JNBY Design (HKG:3306) Seems To Use Debt Rather Sparingly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies JNBY Design Limited (HKG:3306) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for JNBY Design

How Much Debt Does JNBY Design Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2021 JNBY Design had CN¥243.6m of debt, an increase on CN¥187.7m, over one year. However, it does have CN¥1.51b in cash offsetting this, leading to net cash of CN¥1.26b.

How Healthy Is JNBY Design's Balance Sheet?

The latest balance sheet data shows that JNBY Design had liabilities of CN¥1.64b due within a year, and liabilities of CN¥466.4m falling due after that. Offsetting these obligations, it had cash of CN¥1.51b as well as receivables valued at CN¥131.5m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥463.0m.

Given JNBY Design has a market capitalization of CN¥5.36b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, JNBY Design boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that JNBY Design has boosted its EBIT by 78%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if JNBY Design can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While JNBY Design has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, JNBY Design generated free cash flow amounting to a very robust 98% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing up

We could understand if investors are concerned about JNBY Design's liabilities, but we can be reassured by the fact it has has net cash of CN¥1.26b. And it impressed us with free cash flow of CN¥1.2b, being 98% of its EBIT. So we don't think JNBY Design's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example - JNBY Design has 2 warning signs we think you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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